Fat cat

Fat Cat Tuesday is the first Tuesday of the year on which top bosses will have already taken home more than the rest of us will earn for the whole of the year.

The High Pay Centre has calculated that FTSE 100 bosses made £4.96m in 2014 compared with average wages of £27,645. The figures highlight a growing pay gap between the top 1% and the rest of the workforce that has been rising since the late 1970s and shows little sign of levelling off.

The pay ratio has increased since the 1990's from 47 times – top to average – to around 180 times as we have seen the creation of a "winner takes all" economy with those at the top rewarded lavishly, and pay for everyone else repressed.

This is a worldwide phenomenon – it is more pronounced in the US where average rewards reached £11.9m last year. Europe is lagging, but fast catching up.

The gap between the top 1% and the rest has driven a rise in inequality, particularly since the financial crisis, which has created divisions in society and hampered the economic recovery.

Burgeoning executive pay perpetuates the myth that top bosses are God-like creatures who are vital to the success of the business. Thomas Piketty, whose bestseller Capital in the 21st Century examined rising inequality worldwide, calls them "super-managers" who, for the first time in history, can become wealthy by rising up the ranks of an established company.

Chief executives are running large, complex organisations and most would admit that their jobs are not easy. They are required to work long hours in stressful, high-profile roles. But even if you factor in 12-hour days and three out of every four weekends spent working, their remuneration still comes out at £1,200 an hour.

And the organisations they lead are made up of thousands of people who all feel they too are working extremely hard, with often miniscule pay rises and growing job insecurity.

A recent survey by the CIPD – the Chartered Institute of Personnel and Development – found that 71% of staff believe their chief executive's pay is too high and 59% said it demotivated them at work. "The growing disparity between pay at the high and lower ends of the pay scale for today's workforce is leading to a real sense of unfairness," said Charles Cotton, CIPD reward adviser.

The message from the workforce is: "the more you take, the less I'll give," said the CIPD.

For chief executives fond of repeating the mantra that their people are the key to an organisation's success, there is a clear message that their workforce feels under-valued and under-rewarded.

However, the way chief executives' incentives work means they can benefit from keeping down workforce wages. Cost-cutting will help boost the share price and many directors' rewards are either in shares or linked to short-term stock market returns.

Why it's bad for business

Research for the High Pay Centre showed that companies with bigger pay gaps did not perform as effectively as those where the gap was narrower. They suffered more industrial unrest, absenteeism and a higher turnover of staff.

So there are strong business reasons for addressing top pay, not to speak of the societal ones.

While there is a great deal of boardroom debate about executive pay with many directors admitting privately that the current system is unsustainable, there has so far been little to stop remuneration ratcheting up further.

It is partly a failure on the part of shareholders to weigh in on big pay awards. Investors have strong powers to vote against executive rewards, but while some are active behind the scenes, few are prepared to take a stand.

How to tackle the growing pay gap

The High Pay Centre has called for Long-Term Incentive Plans, which typically run over three years and are paid out in shares, to be abolished. Executives should be paid a decent salary and a bonus for exceptional performance – rather than just turning up to work.

We also advocate the election of staff to the remuneration committees that set directors' pay – that should inject some common sense into some of the group-think that exists around pay and performance.

On top of all that, we would like to see companies calculating and revealing their own pay ratios between top and average pay – as they will be required to do in the US from next year. Then at least we can compare firms on a consistent basis.

But what it really requires is for captains of industry to make a decision to stand with their workforce they value so highly and resist any increase in their own rewards unless it is reciprocated. Then we might start to see some changes.

Deborah Hargreaves is founder of the High Pay Centre